Process will last between 30 and 60 days, White House estimates

WASHINGTON (MarketWatch) -- President Barack Obama said Thursday that Chrysler LLC will be tossed into bankruptcy to ease its crushing debt burden, a move taken after some of the company's key creditors rejected a sweetened cash offer.

"The necessary steps have been taken to give one of America's most storied automakers, Chrysler, a new lease on life," Obama said.

Obama spoke at the White House following the completion of a deal with Fiat (F) giving the Italian company a beginning 20% stake in Chrysler that would rise to 35% as milestones are reached.

'No one should be confused about what a bankruptcy process means. This is not a sign of weakness but rather one more step on a clearly charted path to Chrysler's revival.'
President Obama

An administration official said he expected Chrysler's bankruptcy, after a filing in New York, to last between 30 and 60 days and added that the process won't affect Chrysler's day-to-day business of selling cars and covering warranties.

Obama sought to dispel any notion that the filing meant Chrysler had one foot in the grave.

"No one should be confused about what a bankruptcy process means. This is not a sign of weakness but rather one more step on a clearly charted path to Chrysler's revival," said Obama.

Messy process seen

But David Silver, an auto-industry analyst at WStreet.com, said that the process, contrary to government assurances, will likely end up being messy.

"There are a lot of people that have laid claims to Chrysler, and it seems that there is just not enough to go around," he said. "I do not think that Chrysler will ever regain the aura it once had, and I doubt it will be a major player on the world stage in the years to come."

The Treasury Department, in a last-ditch effort to avoid the Chapter 11 bankruptcy filing, increased its most recent offer to Chrysler's lenders Wednesday by $250 million to a total of $2.25 billion, with the banks and hedge funds in turn agreeing to forgive $6.9 billion in debt. See related story.

Obama blasted hedge funds for turning down the offer.

"A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout," Obama said.

"They were hoping that everybody else would make sacrifices and they would have to make none," he said. "I don't stand with them."

Obama also said the government would give GMAC, the bank holding company that finances General Motors, money to finance new Chrysler sales.

Chrysler was initially told by the government to reach a deal with Fiat by the deadline or face bankruptcy. But now it has become more apparent that ridding the company of debt and shuttering dealerships through bankruptcy made Chrysler a more attractive partner and facilitated the merger.

Obama said Wednesday night that he was "very hopeful" Chrysler and the government would reach a deal to ensure the company's viability. Marking his first 100 days in office in a prime-time news conference, Obama said he didn't want the government to run auto companies or operate banks.

"I've got two wars I've got to run already. I've got more than enough to do. So the sooner we can get out of that business, the better off we're going to be," he said.

The company will eventually be led by a new chief, according to current CEO Bob Nardelli, who said he plans to step down after seeing Chrysler through bankruptcy.

"My number one priority has been to preserve Chrysler and the thousands of people who depend on its success," he said. "While I am excited about the creation of the global alliance, I am personally disappointed that today Chrysler has filed for Chapter 11. This was not my first choice."

Behind the bailout

Chrysler had been keeping its assembly lines running on $4 billion in emergency U.S. government loans doled out at the start of 2009. That was Chrysler's second federal bailout -- the first took place back in 1980, when the government provided the company with $1.5 billion and Lee Iacocca was handed the top job.

Daimler AG
DAI, +0.79%
on Monday announced plans to unload what was left of its failed marriage with Chrysler, shedding its remaining 19.9% stake and forgiving repayment of loans previously extended. Cerberus bought an 80% stake in Chrysler back in 2007, leaving the rest with Daimler.

Chrysler's bankruptcy comes in the midst of a historic automotive-industry slump and could serve as a preview of what's on tap for rival General Motors Corp.
GM, -1.82%
which faces a deadline at the end of next month to demonstrate its viability.

GM shares added 5.5% to $1.91 following the announcement.

Auto sales have plunged to levels not seen in almost three decades, sending the Detroit trio deep into red ink. Chrysler, specifically, lost $8 billion last year, according to its restructuring plan, as sales were cut by a third to $1.45 million cars and trucks.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.